The Evolution of Energy Regulation in the District of Columbia

Over the past century in the United States, the business and regulatory model for electric and natural gas companies has stayed relatively constant-centralized power plants, high voltage transmission lines/pipeline systems, and regulated distribution companies with service and reliability requirements have dominated the electricity landscape for decades. Over the last twenty years, however, the energy industry has seen some a number of fundamental changes including restructuring and deregulation, energy efficiency mandates, portfolio standards, and specifically in the electric industry there has been the emergence of distributed generation resources. The District of Columbia energy landscape has experienced a number of these changes over the past two decades.

Throughout all of the changes, OPC has remained steadfast to its mandate to protect the public interest by ensuring consumers receive energy service that is safe, adequate, reliable and affordable. Moreover, OPC is advocating for policies whereby consumers can confidently make choices available in the evolving marketplace without being harmed.

Changes in the Natural Gas industry in the District of Columbia

In 1995, Washington Gas Light Company (“WGL”) filed the first of several proposals with the Public Service Commission of the District of Columbia (“Commission”) requesting permission to change the way it conducts business in the District of Columbia. WGL’s goal was to allow natural gas customers of all classes the opportunity to choose whether they want to obtain gas from a supplier other than Washington Gas. WGL’s tariffs proposed to “unbundle,” or separate out, the costs of different components of its service so customers can see exactly what they pay for each component (e.g., the cost of gas, pipeline costs, delivery costs, etc.) The Commission ultimately approved tariffs which authorized WGL to unbundle charges for non-residential customers, authorized large commercial customers to purchase gas from third party suppliers and receive delivery service from WGL, and authorized a program for residential gas customers to purchase gas from third party suppliers and receive delivery service from WGL. The effect of WGL’s unbundling tariffs was to change WGL from a monopoly utility providing totally bundled natural gas service to one offering selected unbundled services in a more competitive market. The impact on WGL’s natural gas consumers is they now have the ability to select a company other than Washington Gas to provide them with natural gas. Additionally, WGL continues to deliver gas to all consumers, regardless of who sells the commodity.

OPC Protects consumers from unscrupulous natural gas providers

In the early part of 2013, OPC began receiving complaints about a number of natural gas providers who were engaging in practices that resulted in consumers being deceived into contracts that resulted in excessive bills. In April 2013, the Office filed a Petition for an Investigation into the business practices of alternative energy suppliers in the District of Columbia.

In May 2013, the Commission granted OPC’s Petition and opened an investigation into the business practices of all alternative energy suppliers and opened an Investigation into the Business and Solicitation Practices of Starion Energy. Over the next several months, several consumers filed written testimony describing their interactions with alternative energy suppliers and the resulting harms.

The case ended in a settlement agreement whereby Starion agreed to recalculate all of the complaints’ bills using an agreed upon process. Additionally, Starion will work with OPC to design and implement materials that will better inform consumers of contract terms and conditions. Starion also agreed to provide $100,000 to the Greater Washington Urban League which used the money to provide energy assistance to low-income consumers. This case highlights OPC’s commitment to support a competitive energy environment while ensuring consumers’ ability to participate in the market by making informed choices and be free from abuses.

Electric Restructuring in the District of Columbia

December 1999 was a pivotal year in the history of electric restructuring in the District. In Formal Case No. 945, the Commission approved a non-unanimous settlement agreement that allowed the Potomac Electric Power Company (“Pepco”) to sell (divest) its power plants and other electricity-generating assets. OPC did not sign the settlement agreement because it did not believe that electric retail competition would benefit residential and small business consumers. Additionally, in 2001, the D.C. Council passed legislation approving retail electric competition which allows more than one company to offer electric service in the District. The main impact on residential consumers of divestiture is that after rate caps expired, residential consumers have experienced a huge increase in the cost of generation and a commensurate increase in their total electric bills.

To implement retail competition in the District, the Commission established a Working Group consisting of various entities, including the Office of the People’s Counsel, and directed the Working Group to recommend a plan of action to address the various issues related to the implementation of retail competition in the District. To that end, the Commission adopted procedures and standards regarding consumer protection and supplier licensing and operations standards, approved a post-divestiture unbundled rate structure for Pepco, established the Renewable Demonstration Grant Program, approved the listing and publishing of price-to-compare data to allow residential consumers to evaluate electricity supplier rates and charges, adopted a market monitoring program, adopted an interim code of conduct while it considers a District-specific code of conduct for energy suppliers, approved energy efficiency, universal service and renewable programs funded by the Reliable Energy Trust Fund, approved net energy metering rules, approved a two-year consumer education campaign to provide electricity consumers with clear, concise, and unbiased information regarding consumer choice, approved rules to implement the Renewable Energy Portfolio Standards Act.

STANDARD OFFER SERVICE IS PROVIDED AS A DEFAULT SERVICE TO ELECTRIC CONSUMERS-FORMAL CASE NO. 1017

Prior to 2001, the Commission regulated electric generation and distribution services allowing Pepco to receive its costs plus a reasonable rate of return on such services, as determined by the Commission. On January 1, 2001 the District’s retail electric market was restructured resulting in the deregulation of electric generation service and the advent of retail consumer choice which was expected to provide consumers with competitive choices from suppliers. Deregulation means the Commission does not regulate the price of electric generation services. To ensure that District consumers have electric generation service if they do not choose a competitive supplier, the Council of the District of Columbia provided for Standard Offer Service (“SOS”). Pepco was required to provide electric generation service under capped rates to District consumers until February 8, 2005. At the expiration of the capped period, a SOS supplier would offer electricity at market rates. The Commission subsequently decided Pepco would be the SOS provider charged with serving the District customers that were not being served by a competitive supplier. SOS procures generation services in a competitive auction and awards a contract to the winning bidder.

Since February 8, 2005, the generation service rate paid by District consumers is the average price of the awarded contract plus an administrative charge plus taxes. Due to an increase in price at the wholesale level, SOS consumers have seen an 85% increase in their generation rate since the caps were removed from the generation portion of consumer bills. Because this service is no longer regulated, the Commission has no control over the amount of the generation service rate.

In an effort to prevent district ratepayers and consumers from being saddled with costly energy supply agreements that provide no tangible benefits for district consumers, OPC successfully fought Mirant’s efforts to have a bankruptcy court absolve it from financial responsibility under such agreements. Without such effort, district ratepayers were facing $541 million in energy supply contract costs.

In June 2000, Mirant purchased Pepco’s power plants for approximately $2.65 billion. As part of that purchase agreement, Pepco was allowed to assign its entire energy supply contracts, known as purchase power agreements (“PPA”) to Mirant, however, a number of the PPAs contained contract language that required Pepco to obtain the PPA supplier’s consent before it could assign that particular PPA. A PPA is an agreement under which Pepco was obligated to purchase power from outside suppliers at a fixed rate. The parties agreed to reduce the power plant purchase price by almost $260 million if Pepco could not obtain consent to assign certain PPAs.

To get around a contract provision that requires supplier consent to an assignment, Mirant and Pepco entered into a “back-to-back” agreement under which Mirant was obligated to purchase energy at the same FERC-approved rates as Pepco. The PPA required Mirant to pay higher than market rates for energy supply. Mirant filed for chapter 11 bankruptcy in July 2003. In its petition, Mirant sought, inter alia, to reject the back-to-back agreement because such agreements were causing Mirant to suffer financial losses. Mirant also sought, and received, an ex parte temporary restraining order preventing the federal energy regulatory commission (“FERC”) or Pepco from taking any actions to require or coerce Mirant to abide by the terms of the back-to-back agreement OPC intervened in the bankruptcy proceeding. Mirant engaged in an aggressive litigation campaign to shed its obligations and to impose costs on D.C. ratepayers and consumers.

A Texas federal court found that the only business justification supporting Mirant’s request to reject the back-to-back agreement was the losses it suffered because the rate for electricity that FERC approved for that agreement exceeds the market rate. Based upon this analysis, the court found that Mirant’s rejection request was a prohibited attempt to avoid their electric energy purchase payment obligations under the back-to-back agreement at the filed rates FERC has found to be just and reasonable. The court then held that the bankruptcy code does not provide an exception to FERC’s authority under the federal power act and that Mirant must seek relief from the filed rate in the back-to-back agreement in a FERC proceeding. Based upon this analysis, the court denied Mirant’s motion to reject the back-to-back agreement as well as its request for permanent injunctive relief. In a subsequent order, the court vacated the bankruptcy court’s injunctive relief because it would interfere with the performance of FERC’s regulatory oversight functions. The court then dismissed the case for failure to state a claim upon which relief could be granted. Mirant appealed the lower court actions.

On April 16, 2004, as the only party representing D.C. electric consumers’ interests, OPC filed a “friend of the court” brief with the united states court of appeals for the fifth circuit to protect Pepco’s interests in $541 million worth of energy supply contracts. On the same day, people’s counsel Elizabeth A. Noël publicly stated “... To save D.C. consumers, OPC must first save Pepco’s interests in these contracts.”

While the United States Court of Appeals for the Fifth Circuit concluded that the lower court acted inappropriately in dismissing the case, it declined to decide whether Mirant could reject the back-to-back agreement since the lower court and bankruptcy court failed to render a decision on the rejection request. The Mirant-Pepco matter was subsequently settled in 2006 thus relieving Pepco and its customers of all obligations under the PPAs. The settlement was a good result for consumers who would have paid millions under the rejected PPAs. Pepco shared proceeds from the Mirant settlement and the transfer of a PPA with its District of Columbia residential customers in the form of a one-time credit of $16.84.